The global minimum tax has upended many conversations about international tax policy, including in the United States. The objective of the policy is to set a global minimum effective tax rate of 15% on corporate profits and to enforce it through a set of interconnected rules. If enough countries adopt these rules, then even those that do not will see the profits of large multinational companies in their jurisdiction subject to the 15% tax rate.
An important question for Congress is how much global minimum tax revenue could the United States collect?
The answer really depends on the minimum tax rules and how they are enacted. At present, it appears that proposed changes to US international tax rules will generate less revenue than official Build Back Better Act (BBB) estimates reveal.
The rules of the global minimum tax model have been released in december and quickly offered as directive in the EU. The rules have three ways of applying the 15% overall minimum tax.
- The first is an additional national minimum tax. This rule would allow a country to levy a minimum tax on profits located within its jurisdiction, whether from domestic entities or local entities of a foreign company.
- The second is an income inclusion rule. This allows a country to levy minimum tax on the foreign profits of its companies if those profits are not taxed at the effective tax rate of 15%.
- The third is the undertaxed payments rule. This allows a country to apply an additional tax to a local entity if other entities in its corporate structure have profits taxed below 15%. It could be in another jurisdiction, even the jurisdiction of the parent company.
One thing to take away from this particular set of rules is that anywhere in the world a company could have profits taxed below the effective rate of 15%, the Global Minimum Tax (to borrow from Liam Neeson) will seek you out, find you and you tax yourself.
But back to the question posed. What is the impact of these rules on US tax revenues?
Last August, Tax Foundation released a series of revenue estimates for several alternatives to international tax proposals. At the time, this was intended to provide insight into the trade-offs and income impacts of options to change the way Global Intangible Low-Tax Income (GILTI) is taxed. In a way, the GILTI is America’s version of a global minimum tax, and it has been collecting revenue since it was passed in 2017.
One of our estimates showed a rough approximation of the United States’ adoption of the global minimum tax that was still being negotiated at the time. In our model, this hypothetical policy generated $106 billion in US tax revenue over 10 years. It included several changes to GILTI to roughly align it with the design of the global minimum tax.
Following this report, we released another set of estimates based on a different scenario. This alternative used the following logic. GILTI is a tax on the profits of American companies that face low levels of taxation abroad. If a global minimum tax is agreed to, however, some foreign jurisdictions will likely increase the taxes they levy on US businesses. This would mean that GILTI revenues could decline even if the United States increased the rate and adjusted the base to align with the global minimum tax.
This scenario showed that adopting the minimum tax in the United States (and around the world) would reduce federal revenue over 10 years by $43.9 billion.
However, it was not yet clear how much revenue could be captured through a national minimum tax (the primary means of collecting the global minimum tax). The Model Rules have made this clear, and in recent months some jurisdictions have indicated how they plan to collect (at least some) of the minimum tax revenue themselves. Low-tax jurisdictions that are exploring options in this direction include Ireland, Switzerland, Singaporeand the United Arab Emirates.
Once the EU Global Minimum Tax Directive is approved, many EU member states will likely implement the National Minimum Tax rule.
On a global scale, this does not affect overall revenue from the global minimum tax. However, this has an impact or revenue is generated.
If the US currently collects income from Irish subsidiaries of US companies through GILTI, and Ireland adopts the national minimum tax, GILTI will collect much less. It may not be zero due to mismatches between GILTI and minimum tax rules, but the change will be substantial.
The revenue score that the Joint Committee on Taxation (JCT) provided to Congress showed that the GILTI changes proposed in the Build Back Better Act would yield $144.3 billion (combined with changes to intangible income derived from the foreigner). If a significant number of countries adopt minimum national taxes that erode the GILTI tax base, then these revenues may never be collected even if Build Back Back succeeds. In other words, JCT does not take into account the possible actions of foreign governments in its revenue estimates.
This means that if Congress passes Build Back Better this year before other countries implement the global minimum tax, that part of the revenue estimate will be closer to a false hope than an economic projection. .
Congress could, of course, choose to implement its own national minimum tax to raise revenue. A proposal from the Build Back Better Act provides for a minimum tax on book income, although it has important differences from the OECD proposal. These differences include better treatment of tax credits and a narrower scope. The OECD rules focus on companies with more than $850 million in revenue, while the Build Back Better proposal targets companies with more than $1 billion in profits.
So the challenge right now is for Congress to figure out what revenues in fact be lifted by their proposals and compare those results to a more important priority: designing US international tax rules with competitiveness, simplicity, and sustainability in mind.
Until now, one of the goals of the Build Back Better Act has been to increase the amount of revenue the United States raises from American companies at home or abroad. With global minimum tax rules in play, it is likely that the expected gains to the US Treasury from the foreign profits of US companies will decline.
Other countries are evaluating model rules and training their sites on a new or simplified approach to corporate taxation while maintaining a competitive edge. US lawmakers would do well to follow a similar path.